Who is responsible for a corporate scandal?

Recent scandals involving Japanese businesses have included bank loans to the underworld and misrepresentations of restaurant menus at leading hotels, and many of the media reports have focused on how management takes responsibility for the mess. I would like to highlight three points that need to be taken into account when discussing such issues:

First, circumstances change with the passage of time. In these fast-changing economic times, corporations that were once considered top-tier can be forced into bankruptcy. Regarding bank loans to problematic borrowers, it is possible for borrowers to meet all requisite conditions when the loans were initially granted but then find themselves in a different situation over time. In such cases, corporations must be in a position to respond appropriately, which effectively means having established in-house oversight mechanisms already in place. In the case of Mizuho Bank, this mechanism appears to have been corrupted as a result of management problems typical of a bank that’s been created through the merger of multiple financial institutions, where the management structure tends to be vertically laid out along the divisional lines of each original bank.

Secondly, who bears responsibility? Regarding loans to the yakuza, the party involved is a corporation — a legal entity as defined by law. Although some responsibility obviously lies with the people at the bank who actually dealt with the loans, it becomes a subject of debate as to who takes the blame for the fiasco as a business entity. In other words, the question is who should take responsibility for an act by a corporation that regularly rotates its management over time?

I recall an experience I once had with a Swiss unit of a company I worked for that is related to the bank loan scandal. When approving annual earnings figures and electing members to sit on the board for the next fiscal year in Switzerland, a resolution is adopted that prevents former board members from being liable for anything that happens at the company at any time after they step down. Under the country’s banking laws, a majority of board members need to be Swiss nationals. I initially suspected that this was a measure of self-protection by the local board members. However, the purpose of such a resolution is to confirm that all responsibilities are formally passed on to the succeeding members of the board. As a result, subsequent board members cannot evade responsibility for an illegitimate loan with an excuse that he was not with the board or the bank when the loan was granted. If they do not agree to such a resolution, they have a choice to step down as a board member. Unless this principle is protected, a situation could emerge where nobody at the bank takes responsibility for problems in a long-term loan approved by their predecessors who have already retired.

When this principle is applied to Mizuho’s yakuza loans, it’s obvious that the responsibility lies with the current members of the board. The question then becomes, who takes the blame for each specific aspect of the problem?

Thirdly, acts of falsification — namely, the menu misrepresentations — can be carried out by corporations and individual businesses. Operators of those restaurants may have had a hard time making money as the cost of ingredients rose with the yen’s depreciation, but that’s no excuse for their actions. In any case, that’s precisely what happens in a competitive market. Market mechanisms can occasionally go too far, but socialism through artificial policy manipulation has historically shown itself to be a failure.

In corporate organizations or individual businesses, responsibility falls on the people who actually drive the day-to-day transactions. The basic principles of commerce are tied to the level of trust that is ultimately formed with your customers, and this relationship of trust is maintained by the people in charge. As economies around the world become increasingly integrated, such acts as menu falsifications represent a betrayal of trust for consumers. We should remember that such actions are not just something individuals or corporations need to be aware of — they can also damage the international credibility of Japan as a whole.